Profile

A Joint Effort

The Janus Triton fund's dual managers, Chad Meade and Brian Schaub, complement each other perfectly, although they came to Janus Capital via very different routes. Noted here are: the Janus Venture fund, TransDigm, with Boeing, European Aeronautic Defence & Space, and Polaris Industries.

Thank You

Error.

Around Janus Capital Group's Denver headquarters Chad Meade and Brian Schaub are often referred to as a single entity. "Even though they have different personalities, it's always 'Chad and Brian' or 'Brian and Chad,'" says Janus's co-chief investment officer for equities, Jonathan Coleman.

This might sound like a career curse, but for the co-managers of the
Janus Triton
(ticker: JATTX) fund, it's reassuring. When they pitched the idea of teaming up to run the fund in 2006, after working side-by-side as analysts for five years, they knew the arrangement would work only if they were simpatico. "Co-managing can be the easiest thing to do and the hardest thing to do," says Meade. "It's easy if you're on the same page with an investment process, but if you're not, the overall strategy becomes diluted."

Besides, "if we were constantly at odds, it would suggest there was something flawed with the process," says Schaub. In fact, if there is any debate between their adjacent offices, it's whether a stock is true to the philosophy that, so far, has served investors quite well. Triton is up 10.74% annually since June 30, 2006, versus 5.78% for the Russell 2500 growth index. The fund, like the index, can have some big swings. Triton, along with its small-growth peers and the index, got walloped in 2008 with a 40% decline. It rebounded in 2009 and 2010, ending those years up 50% and 31%, respectively, before turning in just 2.6% in 2011, though the index was negative.

Under Meade and Schaub's leadership, assets in the portfolio, which typically holds 70 to 100 names, have swelled from $120 million to $3 billion today. In July 2010, the duo took over the $1.5 billion
Janus Venture
(JANVX), which follows a similar strategy but with a focus on even smaller companies. The fund is up 24.47% annually since they took the reins.

While they seem inseparable -- they golf and ski outside the office, their wives are good friends, they even have kids the same age -- Schaub and Meade came to Janus via considerably different paths.

Schaub, 34, grew up in Pasadena, Calif., studied economics at Williams College and in 2000 was recruited by Coleman, then a small-cap manager at Janus, during his senior year. "Had I graduated a year or two later, I doubt I would be sitting here today," he says. Janus stopped recruiting undergraduate analysts in 2002. He also got a crash course in the perils of investing. "I remember looking at my Bloomberg screen, and everything was red," says Schaub.

Meade, 34, was raised in rural southwest Virginia and had aspirations to go to medical school until his sophomore year at Virginia Tech, when he realized he "wasn't cut out for blood and guts," but found a passion for researching stocks for the university's student-run portfolio. After graduating in 1999, he covered transportation for Goldman Sachs in New York. It was a great opportunity, he says, but following a single sector "actually became quite boring." So when Coleman met Meade on a research trip in 2001 and suggested he join Janus's small cap team, Meade didn't hesitate.

In those early years, "we developed a process and philosophy that was identical," says Schaub. So much so that when Triton's top spot opened up in 2006, Schaub and Meade pitched themselves as a package deal.

They knew it would be a tough sale. Most co-managed funds are a mix of a senior manager and less experienced protégé, and there's still a risk of dueling egos. Coleman says he initially had doubts about assigning two chiefs to the fund. "But what was clear to me after talking to them was they felt passionately that, as a team, their strengths would be magnified, and their weaknesses would be mitigated," he says.

More importantly, they adhere to the exact same playbook, which calls for finding small companies -- typically $1 billion to $4 billion in market cap -- that have unique and scalable business models, managers who know how to create value, and distinct competitive advantages.

Schaub and Meade hold their stocks for five years, on average -- far longer than their peers, which typically hold stocks for a bit more than a year -- and closely follow portfolio alumni. That gives them the conviction to turn volatility into a buying chance.

Take
Polaris Industriespii -0.43659711075441415%Polaris Industries Inc.U.S.: NYSEUSD155.07
-0.68-0.43659711075441415%
/Date(1425420376598-0600)/
Volume (Delayed 15m)
:
718278AFTER HOURSUSD155.07
%
Volume (Delayed 15m)
:
3906
P/E Ratio
22.604956268221574Market Cap
10328872959.137
Dividend Yield
1.3671245244083317% Rev. per Employee
639950More quote details and news »piiinYour ValueYour ChangeShort position
[PII]. It was hit hard in the financial crisis, as the snowmobiles, ATVs, and motorcycles it makes are among the "most discretionary products you can think of," says Meade, and roughly two-thirds of purchases are financed. Triton had owned Polaris before, and in early 2009, the managers re-established the position when the stock was trading below $10 a share, or about five times earnings and with a 30% free cash flow yield. "Obviously everyone was scared," says Meade. Yet he and Schaub agreed that Polaris was better able than its competitors to weather a recession.

Janus Capital Group / Janus Triton

Total Returns*

1-Yr

3-Yr

5-Yr

Janus Triton (JATTX)

5.79%

27.19%

8.84%

S&P 500 Index

7.90

19.93

1.33

Russell 2000 Index

-0.26

21.58

1.23

% Of

Top 10 Holdings

Ticker

Portfolio**

Dresser-Rand Group

DRC

2.37%

TransDigm Group

TDG

2.04

SBA Communications

SBAC

2.00

VistaPrint

VPRT

1.97

Heico

HEI

1.80

Gen-Probe

GPRO

1.76

National CineMedia

NCMI

1.73

World Fuel Services

INT

1.73

Landstar System

LSTR

1.67

Sensata Tech Holding

ST

1.65

Total:

18.72%

*As of 4/12/12 ; three and five year returns are annualized. ** As of 2/29/12. Sources: Janus; Morningstar

In 2008, Polaris revamped its supply chain with a bimonthly purchase program for dealers -- a novel idea in an industry where inventory decisions are typically made twice a year -- and shifted to just-in-time manufacturing. As a result, the company was able to ride out the downturn and "capture a tremendous amount of market share," says Meade. Indeed, net income at the end of 2011 was 55% higher than in the year prior. The company, now trading at $72, is generating a 50% return on equity.

Schaub and Meade aim to find companies that can grow at least 15% a year or double within five years. But protecting the downside is as much of a priority. To mitigate risk, the managers look at best-case and worst-case scenarios for discounted cash flow, then weight the portfolio with the surest bets at the top. Even then, they invest no more than 3% of the portfolio in any one firm.

After all, Meade and Schaub are among the fund's biggest individual investors, making them accountable to one another, as well as to other shareholders. "Every day we come into the office," says Meade, "we're each looking one of our biggest shareholders in the eye."